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December 12, 2012

2 Reasons There's A Big Stock Market Rally Coming

of Wall Street Daily
The market is still struggling. The S&P 500 is still 4% below the post-crash high that it reached in September.
A fear of two things has kept a true rally from taking place: the Fiscal Cliff and some recent uninspiring economic numbers.

You can write both of those fears off as a fabrication.

The key to investing is figuring out when the market is wrong and when the mistake will be corrected. That’s what this double dose of false fears is offering now.

Indeed, the market pessimism is actually creating a buying opportunity ahead of the strong rally that I predict will start off the year.

Let me explain…

The Two Factors Misleading the Market

The concerns that the Fiscal Cliff debate will destroy our economy are nonsense.

There’s no other way to put it.

There’s enough at stake here that lawmakers will reach a solution – no matter how contentious the arguments get.
It might come down to the wire, but don’t lose any sleep over the fear of sequestration.

On top of that, if our venerated politicians do manage to bungle this, impartial economists are starting to push back on just how damaging sequestration would be to our economy.

Make no mistake about it: The frenzy around the Fiscal Cliff is a product of the media competing for your eyeballs.
Heck, we’re doing it too. Fiscal Cliff coverage gets lots of attention. We’re just telling the truth about it.
Once these debates get resolved – and again, they will – the market will rally. Simple as that.

Now, the concerns about recent economic numbers are closer to reality. But they shouldn’t amount to much.
You see, earlier this week, the ISM Manufacturing Index didn’t meet expectations. And Macro Advisors, a forecasting firm that compiles leading economic indicators with a good track record, puts fourth-quarter GDP at 0.8%, which is very low.

So is the recovery slowing? I don’t think so.

First, Hurricane Sandy’s going to skew every number that comes out for the next two months. When you look at quarterly numbers, it’ll likely be smoothed out at that point. But monthly numbers will be affected.

Something like the ISM Index clocking in at 49.5 – rather than the expected 51.4 – is just what this temporary dislocation will do.

On top of that, the uncertainty surrounding the election and the Fiscal Cliff has led to a delay in business investment. You can see that it’s fallen off the trend that’s been established since the recovery started.

I suspect this spending to surge again once the Fiscal Cliff has passed, adding a real boost to economic numbers and the market.

It’s easy to get caught up in the pessimism of the news, but this is a time when a proper contrarian view can identify a short term opportunity in the market.

Today was a perfect example…

The BLS released an encouraging job report, and real employment was probably even better thanks to these numbers being skewed by the hurricane. On the same day, consumer confidence fell sharply.

Right now, measures of sentiment are weak, but actual economics are strong. That’s when you buy.

Courtesy Matthew Weinschenk at Wall Street Daily (EconMatters author archive here)

The views and opinions expressed herein are the author's own, and do not necessarily reflect those of EconMatters.

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